North Bank Numbers give Hope to Iraqi Economy

The process of capital formation is underway in Iraq, and that is good news for the grass roots economy. At least that’s what stock market-listed North Bank’s latest earnings results indicate.

Iraq’s gross domestic product has been growing at a rapid pace, but that’s mostly due to rising oil production and robust oil prices. The big question is: will oil proceeds help the rest of the economy take off?

In an important development, it appears that people are now confident enough to take their money out from under mattresses and put them in banks. North Bank’s deposits grew a whopping 45 percent in the first half of 2012 to reach ID917 billion, attracting customers with a deposit rate of 7 percent.

This encouraged the bank to increase loans by 27 percent in the first six months of this year. Historically, about 80 percent of the new loans went to companies, with the remainder went to personal and car loans.

With the increase in deposits and reserves, cash also increased to ID612 billion from ID434 billion at the end of 2011, which gives the bank much room to lend more, and start investing in bigger projects.

This is a big deal. Small companies across Iraq are crying out for capital, and if they receive it, growth can be rapid. The country currently produces very little itself, so a raft of light manufacturing and basic services companies could easily spring up and become national champions.

But for now, borrowing is still very difficult. Even North Bank, which is more progressive than many Iraqi banks, is loath to lend for as long as even one year as risk assessment capabilities are underdeveloped.

Although its lending rate may be lower than competitors, comparing North Bank’s 5 percent margins with regional margins of about 4 percent shows that while it is not a long way off the average, it is getting there faster than other Iraqi banks – some of which have 7-8 percent margins or higher.

The hope is that North Bank will move further down the road of lower margins and higher business volumes, and take the rest of the banking sector with it.

Sherif Salem is portfolio manager at Abu Dhabi-based asset manager Invest AD. He manages the Invest AD Iraq Opportunity Fund, as well as helping to manage other equities funds investing in the Middle East and Africa.